Prime Movers report: Transtasman rivalry churned up by Fonterra

Australia is our biggest export market but Fonterra regards it more as part of its home base. Agriculture reporter MARIANNE KELLY found an air of expectancy pervading the Australian dairy scene as it awaits Fonterra's game plan.

The voice quavered but the eyes twinkled as Victorian dairy farmer and long-standing farm politician Alex Arbuthnot admitted Kiwi inroads into his country's dairy farming and manufacturing-marketing industry are good news for Australian farmers and the country.

"This is going to hurt me," he said. "But we admire the New Zealand industry's vision. Now that Fonterra is here, the dairy scene has changed. New Zealand has always seen Australia as a valuable domestic market with 20 million people. But our success is still dependent on offshore markets and we admire New Zealand for its vision, especially in export."

Arbuthnot became the first dairy farmer president of the Victorian Farmers Federation in 1989 after holding senior offices in United Dairy Farmers of Victoria through the 1980s. He is a committee member of the Australian Dairy Farmers Federation and the National Farmers Federation. His family milks 300 cows doing 8400 litres per cow annually on 80ha of flood-irrigated land near Sale, in Gippsland, southeastern Victoria.

He said he's "a grass man" but, following the general trend, his son is intensifying the operation with grain feed. Arbuthnot thought Kiwi dairy farmers who continued to settle in Victoria might learn a thing or two about grain-fed dairying.

"Kiwi farmers will embrace it. It will be interesting to see how they go when they get access to cheaper grain. They're sharp farmers."

New Zealand dairy farmer Ian Stronge and his family moved to Yarrawonga, in the state's north, from Opunake, Taranaki, in 1996. They milk 500 cows on 260ha 2km from the Murray River.

Competition between New Zealanders and Australians is "part of the conversation," Stronge said. "But they don't resent the Kiwis. Inter-state rivalry is high and it's the same for New Zealand and Australia. They like the competition and they know that New Zealand can stand up for itself."

Stronge says Fonterra's entry into the Australian market was "the best thing since sliced bread. I can't say that Fonterra will take over the industry here but the sooner Australia and New Zealand form a marketing arm, the better off both countries will be.

"Farmers here are still pre-occupied with whether one dairy company is paying more than the other and can't see that our competition is in the overseas markets and among the supermarkets. There is a need for more lateral thinking here."

An air of expectancy pervades the Australian dairy scene as the players wait to see what the New Zealand game plan is for their industry, now that Fonterra has consolidated its Australian interests into Australasian Food Holdings (AFH), one of Australia's biggest consumer dairy foods companies.

Fonterra inherited an 80 per cent shareholding in Western Australian company Peters and Brownes from Kiwi Dairies; 18 per cent in Victoria-based National Foods from New Zealand Dairy Group; and a 25 per cent interest in Bonlac Foods from the Dairy Board, forming a joint venture company called Bonland Dairies.

AFH was formed by rolling in Fonterra's interest in Bonland, and Peters and Brownes along with its New Zealand Mainland and Tip Top operations, giving Fonterra 75 per cent while Bonlac Foods has 11 per cent.

Forming a transtasman alliance provided Fonterra with the strong domestic base that New Zealand's four million population cannot sustain. Gaining a foothold in the local market makes sense, Stronge said; "There are more ways of gate-crashing a party. You don't have to go through the front door."

But one Australian dairy trader likens the Kiwi moves on the market to making love followed by gang rape. The New Zealanders, some said, were nicely positioned to do what they wanted and they could afford to be patient before making a bigger investment.

Also, despite the fact Fonterra had only a 25 per cent shareholding in Bonlac, it was perceived as calling the shots as company managers were replaced with New Zealanders. The cynics said the Dairy Board, in rescuing Bonlac from a parlous financial position, had allowed Fonterra to exercise a disproportionate amount of control from a minority position.

In matching the payout of its main competitor in Victoria, Murray Goulburn, Bonlac may have weakened itself, giving an opportunity for Fonterra to up its stake. Also, Bonlac's 50 per cent share with Fonterra in Bonland Dairies would not have translated into an 11 per cent share in AFH without cashing up its stake in its brands.

The Australian dairy industry harbours an innate distrust of New Zealanders which goes back to the 1970s when Australia's export markets collapsed after Britain joined the European Union. Australia got nothing from the negotiations - "the screaming babies" across the ditch got an access agreement. Australia's politicians did nothing, saying Britain "will look after us". It didn't and New Zealand was blamed.

Since then fears have bubbled under the surface about what New Zealand might do in their market. Little happened until now.

Foreign ownership in the Australian dairy industry is not new, said Sandy Murdoch, formerly chief executive of South Island-based Alliance Meat Company and Taranaki Tui dairy co-operative before he moved to Australia, where he is managing director of the Australian Dairy Corporation. Kraft and Nestle are established players and Parmalat is a more recent entrant.

But, he said, Fonterra was the first foreign investor to be a competing producer and exporter into global markets.

"In the last few months it has been transparently evident to the Australian industry that New Zealand has greater opportunities than are reflected in its mix of investments, and the step to form AFH partly reflected that. So there is speculation about the next step they may take."

Another ex-pat, Mike Murray, formerly with the Dairy Board and now managing director of Prestige Foods, Victoria, said it was inevitable New Zealand would become a bigger player and there was also scope for both countries' lamb and wool industries to rationalise their approach.

But John Doyle, a board member and ex-executive director of Kraft Foods, was critical of Fonterra's domestic market skills. The greatest leverage for increasing farmers profitability was the influence it could exert on world prices by getting together with Australia's largest exporter, Murray Goulburn.

"But MG is strong and doesn't need them. A lot of bridge building is needed before there is general acceptance of the Kiwis," he said.

"In the long term they must develop a conscious strategy to build bridges and be nicer people."

A similar warning came from Colin Glass, general manager of Tasman Farms, Dunedin, who hoped the influx of New Zealand farmers, mainly into Victoria, did not repeat the mistakes of those who went to Tasmania in the mid-90s.

"There was an air of arrogance that New Zealand had all the answers, that the locals were idiots," Glass said.

"The Kiwis made life difficult for themselves and the perception of arrogance has been attached to the Kiwis in Oz."

Fonterra's concentration on Australia's domestic market attracts puzzled looks at National Foods headquarters in Melbourne where chief operating officer Peter Margin says Fonterra's 18 per cent investment in the publicly-listed company was regarded with ambivalence. National Foods is tipped as the route Fonterra may take for a back-door listing on the Australian Stock Exchange.

But export accounts for only about 3 per cent of National Foods revenue, Margin said.

"Our business is building and nurturing brands for fresh milk and fresh dairy products. In contrast with Fonterra, building a stable world-competitive commodity product business is not our game. So we see a mismatch of capability.

"A school of thought says that if Fonterra could have an influence in the Australian commodities supply, it would be in a position to influence pricing. Controlling the Southern Hemisphere milk flow is the game. If it could do that, its next move would not be on National Foods."

Also, there is speculation about where New South Wales co-operative Dairy Farmers fits into the jig-saw. While it primarily services the domestic market, it is described as "not travelling all that well", consequently at risk of being left to hang out and wither if it doesn't join the party with New Zealand.

Margin said the question Australians were asking was not if but when the Kiwis would take a bigger holding in Australia.

Arbuthnot said Australian farmers were speculating whether Fonterra would service its markets first and Bonlac later.

Meanwhile, New Zealand farmers have questioned whether they have subsidised Bonlac's efforts to compete with Murray Goulburn's payout, including last season's highest industry price of A$8.20/kg ($9.54) butterfat.

Who will benefit? New Zealand or Australian farmers, or neither?

Arbuthnot said despite the tribalism exhibited by both sides, the challenge is for the Australian and New Zealand farmers to think as one: "We don't want corrosive things to happen within."

Further reading:
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